Here are some reasons why mutual funds hold a little edge over shares in terms of investment subject to individual rationality.
The interest in equities is soaring as the stock markets touch new highs. However, the big question remains whether young investors put money in stocks directly or through mutual funds. Here are some reasons why mutual funds hold a little edge over shares (stocks) in terms of investment subject to individual rationality.
Portfolio diversification
It reduces the risk of concentration in a particular stock as here the investment is made in various types of stocks, and such activity mitigates the losses if one or two stocks won’t work or incur losses. But in case of direct investment in stocks, one won’t invest in more than 10 stocks on an average, thereby entailing huge risks on his investment in case of volatility.
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Professional management
Mutual funds are professionally managed by a team of fund managers who do a lot of research and study various stocks and then identify and pick up such select stocks that are more profitable or those that signify growth in near future. They study the financial statements and other necessary information about the companies, and are well-versed with the risk management process. On the other hand, investing in stocks means an individual will have to study the stock market himself, and analyse the headwinds and tailwinds of such stocks. That is the reason why the task of identifying, analysing and evaluating risks isn’t a beginner’s cup of tea.
Disciplined approach
A mutual fund follows a very systematic-cum-professional-cum-disciplined approach towards investing investors’ money, and then there are various types of funds here in the form of equity, debt, hybrid, gold, etc., with specific goals like retirement, children’s plans, etc. Depending upon your investment horizon, you can go for either liquid funds or corporate bond funds. You can also take the Systematic Investment Plan (SIP) route.
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Tax benefits
There are benefits in the form of deductions available under Section 80C of Income Tax Act when investing in certain schemes in mutual funds, for e.g., Equity-Linked Saving Scheme wherein deduction of up to Rs 1.5 lakh per year is available. No such benefit is available in direct stock investment and one has to pay certain charges like STT, dividend distribution tax, capital gains tax, brokerage charges. In mutual funds, one has to pay fund management fees.
If an investor has time to study and research various stocks and its financial information, then he can create his own stock investment portfolio. But if we are not able to conduct adequate research or dedicate sufficient time in understanding and evaluating various stocks and their related news, and want our money to be looked after by fund managers professionally whose intent is to provide us a consistent return over a long term period specifically by investing in a diversified manner, then mutual fund is the best option for investing.
